How Much Money Do I Need to Retire? What’s My Magic Number?

When you ask yourself, “How much money do I need to retire,” wouldn’t it be great to know exactly how much money you need to be comfortable for the rest of your days? Is it possible to calculate that “magic number?” Does it even exist?

Figuring out your magic number for retirement might not actually require a crystal ball…

That “magic number” is difficult to come up with and is unique for each individual, according to Chris Hardy, a certified financial planner and enrolled agent from Suwanee, Georgia.

Quite simply, a person should have more income than expenses, Hardy says. A pre-retiree can achieve that by paying off all debts—including any mortgages—before he or she retires. Then, the pre-retiree should add up all of his or her monthly obligations, like utilities, travel expenses, insurance payments, taxes and groceries, plus any amount that he or she would like to have on the side as “fun money.” All together, this represents a pre-retiree’s “must-have” income amount.

Then, the pre-retiree should add up all of his or her income sources beyond retirement funds, such as pensions and rental income. Now, all of the pre-retiree’s expenses can be subtracted from all of his or her income. If there is a shortfall, that number can be divided by 4% to give an asset amount that is needed to find “the magic number,” Hardy says.

For example, if all of a pre-retiree’s monthly obligations add up to $5,500 per month, and his or her income sources will only bring in $3,600 per month, this means he or she will have an annual shortfall of $22,800. This number can then be divided by 4% to get to $570,000—the “magic number” this pre-retiree will need to fund a retirement that could last as many as 30 years.

It is important to keep in mind that there are many factors that could change a retiree’s financial status during retirement, including market volatility, health issues and higher taxes, Hardy notes.

Sound complicated? A retirement calculator can do all the work for you. The NewRetirement Retirement Calculator is an easy to use but very detailed and sophisticated tool. You input your information and the system performs hundreds of different calculations and provides charts to help you understand your financial situation. Don’t like your results? The calculator let’s you add more information, change your assumptions and keep playing with your data until you find a financial plan that will work for you.

Does the Magic Number Really Work?

Not every financial planner thinks “magic numbers” are a good thing—or that they even exist.

Scott Weiss, a certified financial planner and the director of financial planning for Weiss Financial Group in Mahopac, New York, does not believe in a “magic number.” In fact, sometimes having a “magic number” in mind could be detrimental, he says.

“If you are not regularly assessing your financial situation, having a single number stuck in your head could be counterproductive to your success,” Weiss says.

Instead of concentrating on your “magic number,” Weiss recommends building a solid retirement plan, setting a goal to save between 10% and 20% of your income, investing your money, and regularly reviewing and revising that plan.

“In order to more accurately determine how much to set aside for retirement, you need to have a clear idea of how much you are spending annually to support your current lifestyle,” Weiss explains.

Also—your magic number can change over time, as you get older.

The nearer you get to retirement the more accurate your “magic number” predictions will be, Weiss explains. When you are younger, however, you can still work with approximations and run monte-carlo simulations, or probability simulations, on your numbers, he says. Weiss suggests revisiting those approximate numbers on a regular basis to account for changes in your spending habits, income and lifestyle.

“There are many quick ‘what is your number’ calculations,” Weiss says. “I think it is more nuanced than that. It should be a conversation.”

How Much Money Do I Need to Retire? Retirement Calculator Helps You Find Your Magic Number

Weiss has many good arguments against having a magic number. And, it is very true, there is no universal magic number and your number WILL change as the economy shifts and your personal situation evolves.

However, a really good retirement calculator can give you the nuanced inputs and analysis to get a great idea of how much money you will really need.

Retirement planning involves a lot more than saving and investing. In the grand scheme of things, there are other criteria that can have more impact.

You need a retirement calculator that let’s you have different levels of income and expenses for the rest of your life. (You probably won’t be spending or earning the same amounts in 10 years as you are now.) You also need a calculator that helps you model healthcare spending. You want a calculator that let’s you assess your home equity as part of your plan. You want to take a hard look at when to start Social Security to maximize benefits. You need to understand how to handle long term care risk.

The NewRetirement retirement calculator is one of the only tools that does all this and more. Best of all, you are in the driver’s seat. You control the inputs and assumptions.